Question

Falcon Co. produces a single product. Its normal selling price is $30.00 per unit. The variable costs are $19.00 per unit. Fixed costs are $25,000 for a normal production run of 5,000 units per month. Falcon received a request for a special order that would not interfere with normal sales. The order was for 1,500 units with a special price of $20.00 per unit. Falcon has the capacity to handle the special order, and for this order, a variable selling cost of $1.00 per unit would be eliminated. If the order is accepted, what would be the impact on net income?

Answer 1

Accepting the special order at $20.00 per unit will lead to a $3,000 increase in Falcon Co.'s net income, after considering the variable costs and the elimination of a $1.00 variable selling cost per unit.

Step-by-step explanation:

If Falcon Co. accepts the special order at a price of $20.00 per unit for 1,500 units, while eliminating the variable selling cost of $1.00 per unit, the impact on net income can be calculated as follows:

• Additional revenue from special order = 1,500 units × $20.00/unit = $30,000
• Variable costs saved per unit (selling cost) = $1.00/unit
• Total variable cost savings = 1,500 units × $1.00/unit = $1,500
• Total production cost of special order = 1,500 units × $19.00/unit = $28,500
• Net impact on income = (Additional revenue + Variable cost savings) - Total production cost of special order = ($30,000 + $1,500) - $28,500 = $3,000 increase in net income

Answer 2

If the order is accepted the net income is increased by $3,000

Step-by-step explanation:

Since in the given question, the variable cost is $19.00 per unit and for special order $1.00 per unit is eliminated.

So,

Revised variable cost is $19.00 - $1.00 = $18.00 per unit.

And, the selling price is $30.00 per unit.

By considering the special price per unit and revised variable cost per unit we can calculate the profit per unit which is equals to

Special price per unit - revised variable cost per unit

$20.00 - $18.00

$2.00 per unit

As for 1,500 units, the special order is placed.

So,it would increase the net income by

Special order units × Profits

1,500 units × 2.00 per unit

$3,000

Hence, if the order is accepted the net income is increased by $3,000